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Notes to the consolidated fnancial statements (continued)

for the year ended 30 June 2011

34. Group risk management (continued)

34.7 Derivative fnancial instruments and hedging

The Suncorp Group operates in multiple currencies and is a signifcant borrower and investor in the global markets. Derivatives are used by each business area to mitigate interest rate, foreign exchange and equity price risks. Derivatives used include exchange-traded bills and bond futures, equity index futures, over-the-counter (OTC) forward foreign exchange contracts, interest rate swaps and currency interest rate swaps.

To prevent derivatives being used as a source of gearing, all derivatives have to be wholly or partly cash covered depending on the type of risk undertaken. The investment mandates specifcally prohibits the use of derivatives for leveraged trading. Leverage here is defned as creating a portfolio which would have sensitivity to an underlying economic or fnancial variable which is greater than could be achieved using only physical securities.

The use of derivatives exposes the Suncorp Group to credit risk. Exposure limits have been established with respect to the various asset classes. Within each asset class, derivative exposure limits are identifed in the investment mandates and limits have been established on daily transaction levels. For OTC derivatives, authorised counterparties must have a minimum credit rating equivalent to a Standard & Poor’s rating of ‘A’.

The investment manager is responsible for monitoring these positions to ensure they do not exceed the authorities established in the investment mandate. Investments

To a limited extent, derivatives are used within the investment portfolios where it is more effcient to use derivatives rather than physical securities. The use of derivatives is consistent with the objectives of the overall investment strategies and is one of the means by which these strategies are implemented.

Hedging of fuctuations in interest rates

Banking seeks to minimise volatility in net interest income through use of interest rate derivatives, primarily vanilla interest rate swaps. The swaps are managed over a three-year period which is approximately the average loan life. At balance date, Banking had one (2010: four) swap designated as a fair value hedge of a fxed rate subordinated note issue and one (2010: zero) swap designated as a fair value hedge of a fxed rate bond held. All other interest rate swaps designated as hedges are cash fow hedges. The swaps designated as cash fow hedges are hedges of either variable rate mortgages or variable rate short-term debt. Hedging of fuctuations in foreign currency rates Banking hedges its exposure to fuctuations in foreign exchange rates through the use of derivatives in the foreign exchange market. The currencies giving rise to this risk are primarily US Dollars, Euro and Pounds Sterling.

Banking hedges its offshore debt issues using cross currency interest rate swaps and foreign exchange swaps. In respect of other fnancial assets and liabilities held in currencies other than AUD, Banking ensures that the net exposure is kept to an acceptable level through participation in the spot and forward markets.

All cross currency interest rate swaps entered into by the Suncorp Group are designated as hedges using the split approach. Under this approach the benchmark rate component of the swap is accounted for as a fair value hedge and the margin component as a cash fow hedge. Banking has elected to fair value its Euro Commercial Paper portfolio through the proft or loss on the basis that it is economically hedged by forward foreign exchange contracts. Both the changes in the fair value of the forward contracts and the debt issue are recognised. The fair value of forward foreign exchange contracts used as economic hedges of monetary liabilities in foreign currencies where hedge accounting is not applied as at 30 June 2011 was $39 million (2010: $37 million). General Insurance has forward foreign exchange contracts in relation to the overseas liabilities portfolio. Under the contracts, General Insurance agrees to exchange specifed amounts of United States dollars at an agreed future date, at a specifed exchange rate.